GLOSSARY OF ACCOUNTING TERMS - PART 5

Net Purchases: Net Purchase is the Purchase disclosed by an enterprise after deducting the Purchase returns. Net Purchase = Gross Purchase – Purchase Returns

Net Purchase could also mean the value of the Purchase after deducting GST or other taxes thereon. Net Purchase = Gross Purchase - GST

Net Profit: Net Profit is the net income earned by a business. It is calculated by reducing all expenses from all the incomes earned by a business.

Net profit or earnings after tax (NPAT/EAT): NPAT or EAT indicates the net profit earned by a business after payment / provision of income tax.

Net Profit Ratio: Net Profit ratio indicates the ratio of the Net profit to the sales. It is calculated as percentage of Net profit to the net sales. ie. (Net Profit / Net Sales) x 100.

Net Sales: Net Sales is the sales disclosed by an enterprise after deducting the sales returns. Net Sales = Gross Sales – Sales Returns

Net Sales could also mean the value of the sales after deducting GST or other taxes thereon. Net Sales = Gross Sales - GST

Non-cash item: A non-cash item refers to an expense listed in an income statement that does not involve a cash payment. Eg. Depreciation.

Non-current Asset: Non-current assets are a company's long-term assets which will not be realized within the accounting year. They are typically highly illiquid, meaning these assets cannot be easily converted into cash. Eg. Fixed Assets, Long term investments.

Non-current Liability: Non-current liabilities, also called long-term liabilities or long-term debts, are long-term financial obligations listed on a company’s balance sheet. These liabilities will become due beyond twelve months in the future. Eg. Long term bank loan.

Non-operating expense: Non-operating expenses are those expenses which are not directly related to the core business of the company. Eg. Loss on sale of asset.

Non-operating income: Non-operating incomes are those incomes which are not related to the core business of the company. Eg. Interest on investments, profit on sale of assets.

Normal loss: Normal loss is the loss of quantity / weight which is expected in a manufacturing process. This loss occurs due to the nature of the manufacturing activity carried out and is unavoidable in nature. Normal loss by itself does not have any monetary value. It is recorded at the scrap value, if any.

Operating expense: Operating expenses are those expenses which are directly related to the business activity. These may be broadly divided into sub-groups like manufacturing, administrative, finance, selling or distribution expenses.

Operating income: Operating income is the income earned from the core activity of the business. Eg. Sales.

Outstanding expense: Outstanding expense is the expense which has accrued or become due for an accounting period, but which has not been paid till date. It is treated as a liability for the business.

Partnership: A partnership is a form of organization in which 2 or more persons come together to conduct business for the benefit of all partners, and as defined and governed by The Partnership Act, 1932.

Piecemeal distribution: A piecemeal distribution is a system where the liabilities of a partnership firm are paid off in parts (piecemeal) as and when the assets are disposed off upon the dissolution of the firm.

Preference Shares: Preference shares are a type of shares issued by a Company which get preference (before equity shares) for payment of dividend and for repayment / redemption upon the liquidation of a Company. The rate of dividend payable on the preference shares is also fixed.

Prepaid expense: Prepaid expense is the expense which has been paid but has not accrued or become due for an accounting period. This expense, although it has been paid, pertains to a future period. It is treated as an asset in the Balance Sheet of a business enterprise.

Profit & Loss Statement: Profit & Loss Statement is a financial statement which summarizes the incomes and expenses that have accrued to the business enterprise for a specified period (Eg. For a financial year or for 3 months). This statement indicates the profit or loss incurred by the business.

Profit prior to incorporation: In a case where an existing non-corporate entity having a running business is converted into a Company, the profit earned by the entity till the date of the incorporation of the Company is treated as a profit prior to incorporation. This profit, being earned by the Company before its formation, is not treated as a business profit and is transferred to a Capital Reserve Account.

Proforma invoice: Proforma Invoice is an unofficial document prepared by a business indicating the probable value of the goods to be sold or delivered. This document is not recorded in the books of accounts.

Property, Plant & Equipment: Property, Plant & Equipment is a term used to refer to Tangible Fixed Assets. Eg. Land & Building, Plant & Machinery, Computers etc.

Proprietor's funds: Proprietor’s funds refer to the funds which belong to the owners of a business enterprise. Eg, For a proprietorship or partnership concern, it could refer to the Capital and Current Accounts of the proprietor or partner. In case of a Company, it refers to the aggregate of the Share Capital and Reserves & Surplus of the Company.

Provision: A provision refers to accounting for an expense which has been accrued, but the exact amount of which is not known. Hence, an enterprise records an approximate amount as an expense based on certain estimations. Eg. If the electricity bill of March is not received, a Company might estimate the amount of electricity cost based on past data and make a provision for that amount. When the actual bill is received, it will be recorded and the provision made will be reversed in the accounts.

Quick Assets: Assets which can be converted into (sold / disposed) cash or cash equivalents in a short period of time are called Quick Assets. Eg. Debtors, Short-term investments.

Quick Liabilities: Liabilities which have to repaid in a short period of time are called Quick Liabilities. Eg. Payment to Creditors, payment of Bills Payable, Outstanding Expenses.

Quick Ratio: Quick ratio is the ratio of the Quick Assets to the Quick Liabilities. It indicates the liquidity position of a business. A higher quick ratio indicates that a business is able to convert its assets into cash very quickly and is able to pay its short-term liabilities comfortably. A ratio of 1:1 or greater is considered as an acceptable quick ratio.

Raw materials: Raw Materials are the basic materials used for manufacturing a product.

Redemption: Redemption refers to the process of repayment of securities like Debentures or Preference Shares. This involves refunding of the money invested by the security-holders and cancellation of the said securities.

Reserves & Surplus: Reserves & Surplus is a grouping in the Balance Sheet which aggregates all the various profits, gains & reserves (both capital and revenue) earned by the enterprise.

Retention money: In a construction contract, retention money refers to the money held back by the Contractee (customer) from the Contractor (supplier). This amount is paid by the contractee to the contractor only after a certain period of time and when the contractee is assured of the quality of the work done by the contractor.

Revenue expenditure: Expenditure incurred by an enterprise in the normal course of the business and which gives short term benefits to a business is called Revenue Expenditure. Such expenditure is shown on the debit side of the Revenue Statement. Eg. Salary paid, Rent paid, Purchase of Materials etc.

Revenue Profit / Loss: Profit / Loss earned by an enterprise in the normal course of business is called Revenue Profit / Revenue Loss. Eg. Profit on sale of shares by a broker, Loss on destruction of stock.

Revenue receipt: Amount received or income earned by an enterprise in the normal course of a business is known as a Revenue Receipt. Such receipt might be recurring in nature. It is shown on the credit side of the Revenue Statements. Eg. Sale of goods, discount received, interest received on investments etc.

Revenue Statement: Revenue Statement is a general term used to refer to a statement or an account that shows the income and expenditure of a business. Eg. Manufacturing A/c, Trading A/c, Profit & Loss A/c, Income & Expenditure A/c.

Royalty: Royalty is a payment made by a user of a particular asset to the owner of the asset for its use. Such asset could be a copyright or a patent. Eg. A publisher selling a book will pay royalty to the Author of the book. A music company or TV channel playing a song will pay a royalty to the singer.

Secured loan: A loan or borrowing against which certain assets have been offered as a security is called Secured Loan. If the borrower defaults on the repayment of the loan, the lender has the right to take over the secured assets and recover the amount of the loan by disposing those assets.

Selling expense: Selling expenses are expenses incurred for facilitating or promoting the sale of goods or services. Eg. Advertising expenses, Sales Promotion expenses, Discount allowed.

Share application: Share application is a process where a Company making a fresh issue of shares invites bids or applications from the public for subscription to these shares. An applicant may be required to pay a certain amount on application.

Share allotment: Share allotment is a process where a Company allots shares to the persons who have applied for the shares. A company will also collect a certain amount towards the paid-up value of the shares.

Share calls: A share call is a process by which a Company asks the shareholders to pay a certain amount to make a partly paid-up share fully paid up.

Share forfeiture: In case a shareholder does not pay the amount called up on a partly paid-up share, the company can cancel the shares allotted to that shareholder and forfeit (not refund) the amount which has already been collected from that shareholder on application or allotment. The amount so forfeited is shown separately in a Share Forfeiture Account.

Specific identification method: Specific Identification method is a method of valuation of inventory where the cost of each item of inventory is separately identified and considered. Eg. In a saree store if there are 100 sarees, the cost of each saree being different will be identified separately for valuing the stock.

Standard cost: Standard cost is a pre-determined cost based upon engineering specifications and representing efficiency at specified level of production.

Standard costing: Standard costing is a technique of costing used for measuring the efficiency and variance in costs by comparing the standard costs with the actual costs incurred.

Statement of affairs: Statement of Affairs is a statement showing the list of assets & liabilities as on a particular date. This statement is not a part of the books of accounts. It can be said to be like a rough balance sheet maintained for a small business not maintaining proper books of accounts.

Straight line method: Straight line method is a method of computing depreciation. The depreciation is calculated on the original cost of the asset.

Tangible assets: Assets which have a physical form are called Tangible Assets. Eg. Machinery, Furniture.

Tax invoice: Tax invoice is a document issued on the supply of goods or services indicating the nature of the goods or service supplied, the quantity supplied, the sale price and the GST levied on the supply.

TDS payable: Tax Deducted at Source (TDS) payable is the amount of TDS which an enterprise has deducted on the payment made by it to another party. This amount is then payable to the Government and is in the nature of a current liability for the enterprise.

TDS receivable: TDS receivable is the amount of income tax (TDS) deducted by another party on the payment made to us. This represents the amount of income tax paid on our behalf by the other party and is treated as a current asset.

Trading Account: Trading Account is a part of Final Accounts. It shows the direct incomes and expenses incurred by a business through trading activity. The balancing figure in the trading account is Gross Profit or Gross Loss.

Underwriting: Underwriting is an agreement where an underwriter agrees to subscribe to or purchase securities offered in an IPO (initial public offer) in case of under-subscription of the issue by the public.

Unsecured loans: Loans taken against which no security has been offered are called Unsecured Loans. In case of a default, the lenders have no mechanism to recover the outstanding dues. The lenders can only opt for legal action to recover the dues.

Valuation: Valuation is an analytical process for determining the value of an asset or security. Valuation process involves use of various techniques to determine the value.

Variable cost: Variable cost is a cost which varies with the change in output. If the output increases, the cost will increase proportionately and vice versa.

Weighted average cost: Weighted average cost is the average cost determined after giving appropriate weightage to the various variables involved. Putting it simply, it can be computed by dividing the total cost by the total quantity.

Work in progress: Work in Progress indicates the cost of work done / cost involved in manufacture of a product where the product has remained incomplete as on the reporting date. The cost of Work in Progress is treated as an inventory.

Working Capital: Working Capital represents the amount of funds required to ensure the smooth running of the routine business activities. Technically it is represented as the difference between the Current Assets & the Current Liabilities.

Written down value method: Written down value method is a method of computing depreciation. The depreciation is calculated on the book value or written down value of the asset. Since the book value of an asset reduces from year to year, the corresponding amount of depreciation on an asset also goes on reducing over a period of time.